- Col. Nathan Jessep, A Few Good Men
Imagine Macro Man's surprise when he read a comment on Brad Setser's blog suggesting that access to his humble journal has now been blocked in China. He has no idea if this is true or not, and isn't sure what his reaction would be if it is. Surprise, for sure, tinged with perhaps a touch of pride (clearly he is hitting a nerve!) and more than a little sadness (does Col. Jessep really live in Beijing now?) Somehow, however, Macro Man suspects that his little hobby probably doesn't register on the radar of anyone who really matters. Still, if any of Macro Man's Chinese readers (there have been a few) happen to see this post, by all means let him know that he's not blocked!
Perhaps any web access shenanigans were conducted with a foreknowledge of China's June trade data, which was a whopper. The surplus registered at a massive $26.9 billion, a new record and well above the consensus expectation. Some of the surplus may well have been a product of frontloaded activity resulting from the July 1 withdrawal of some export tax rebates (i.e., subsidies), though in that case it was strange to see exports fall from 28.7% y/y to 27.1%. The real driver behind China's surging surpluses, however, remains tepid imports, which in June rose just 14.2% y/y, well below the expected 20%. Could it be that PBOC has actually managed to tighten and that the economy is slowing?
Trends in China's trade with the US are particularly interesting, as we now have data through May (the month of Madame Wu's visit to Washington, you may recall.) There is a clear seasonality to US/China trade, with a peak in the run-up the Christmas season and a nadir around the lunar New Year. Through the first two months of Q2, China's trade surplus seems to have clawed back less of its Q1 drop than has been the case in recent years. Some of this may well represent the inventory adjustment that the US economy has sustained in the first half of this year. Nevertheless, it is remarkable to see that the growth in China's exports to the US has fallen sharply and is now at its lowest level since the last recession.
Eagle-eyed politicians might also observe that the recent peak in China's export growth to the US occurred just before the Chinese revaluation in July 2005 and that the recent deceleration has come as the pace of RMB strengthening has intensified. Indeed, recent trends in import/export growth are likely to reinforce the notion that the China's undervalued exchange rate is exerting a meaningful influence on trade, and thus maintain US political pressure on China for further action.
Moving forward, however, the US may not be a lone voice in criticizing China's currency policy. China's trade surplus with Europe has trended higher on an even more parabolic path than that with the US, and on current trends may even exceed that with the US in a couple of quarters. There's quite a bit of noise in the data, however, and it will be interesting to see how export growth is distributed when the full set of June data is released next month.
A common defense when China is charged with mercantilism is that the country only runs a surplus with noted consumers, and tends to run a large deficit with other current account surplus countries. That argument may be fading. The May deficit with the rest of Asia registered its smallest reading since the last recession and is only a hair from switching into surplus. Observe the remarkable trend decline in import growth from Asia over the past half-decade; it's hard to avoid the conclusion that China has taken quite a bit of market share from its neighbours over the past few years.
One country which still enjoys a trade surplus with China, however, is Japan. Part of this may be attributable to the relative growth of domestic demand in the two countries, and some of it may suggest that the yen is just as weak as the RMB!
Key focus for the day will be Big Ben's afternoon speech on inflation; might he offer some hints on a switch of focus to headline? Inquiring minds (and TIPS holders) want to know!